Since 1992, the United States and Russia have enjoyed a mutual Income Tax Treaty designed to prevent double taxation and fiscal evasion regarding taxes on income, commonly called the U.S. Russia Tax Treaty. However, two weeks ago (August 16, 2024), the U.S. and Russia agreed to suspend major portions of the tax treaty in a very unusual change of policy.
Change of Policy
The process began on August 8, 2023, with Russia formally notifying the U.S. that it wished to suspend paragraph four of Article 1 and Articles 5-21 and 23 of the U.S. Russia Treaty. Specifically, Paragraph 4 of Article 1 states what benefits will be conferred by each state for agreeing to the agreement. This paragraph provides the reliefs from Article 22 Relief from Double Taxation, Article 17 Pensions, Article 18 Student, Trainee, and Researcher exclusions, and other such major portions of the treaty. The U.S. then formalized their agreement to Russia’s request with Announcement 2024-26 issued in July of 2024 – stating the change will formally go into practice in August as noted above.
Consequences
Now that this suspension has taken effect, we see some immediate consequences for both U.S. companies doing business in Russia and Russian businesses doing business in the U.S. Major impacts include:
- U.S. source payments of interest, royalties, dividends and other similar payments to Russia are now subject to maximum U.S. withholding tax rates of 30% from their previous rates.
- Russian source payments of interest, royalties, dividends, and other similar sources of payments to the U.S. are now subject to Russian domestic withholding tax rates of 15-20%.
- Businesses with Russia-origin royalties, interest, and dividends have also increased to 15% to 20% (depending on the nature of the income);
- U.S. and Russian taxpayers with income sourced in the other country are no longer guaranteed foreign tax credits in their domestic country for income tax paid in the other country.
- Removal of special exceptions for teachers, trainees, artists, athletes and other such professionals.
These changes are effective Friday, August 16, 2024.
Full Treaty
The full text of the Treaty and other treaty-related documents can be found on the Treasury website at https://home.treasury.gov/policy-issues/tax-policy/treaties.
Contact The M&S International Team